Chapter 10

Increases the demand for loanable funds

Government budget deficit

The ___ the real interest rate, the greater is the quantity of saving and the greater is the quantity of loanable funds supplied.

Higher

An ___ in expected profit increases investment and shifts the demand for loanable funds curve rightward to DLF1.

Increase

Increases the supply of loanable funds

A government budget surplus

The supply of loanable funds curve shifts leftward from SLF0 to SLF2 if

-Disposable income decreases -Wealth, expected future income, or default risk increases

Along the supply of loanable funds curve, all the influences on saving other than the real interest rate remain the same. The supply of loanable funds curve shifts rightward from SLF0 to SLF1 if

-Disposable income increases -Wealth, expected future income, or default risk decreases.

But the higher interest rate decreases investment and the quantity of loanable funds demanded by firms to finance investment.

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Other things remaining the same, the greater the expected profit from new capital, the greater is the amount of investment and the greater is the demand of loanable funds.

...

The Ricardo-Barro effect operates if private saving and the private supply of loanable funds increase to offset any government budget deficit. That is, the supply of loanable funds increases by an amount equal to the government budget deficit and the interest rate does not change.

...

When the real interest rate is 6 percent a year, the quantity of loanable funds demanded equals the quantity supplied. There is neither a shortage nor a surplus of funds, and the real interest rate is at its equilibrium level.

...

Loanable funds are used for

1. Business investment 2. Government budget deficit 3. International investment or lending

The four main factors that influence saving and change the supply of loanable funds are

1. Disposable income 2. Wealth 3. Expected future income 4. Default risk

Loanable funds come from

1. Private savings 2. Government budget surplus 3. International borrowing

Saving is the main item and it depends on

1. The real interest rate 2. Disposable income 3. Wealth 4. Expected future income 5. Default risk

Investment depends on

1. The real interest rate 2. Expected profit

Summarized in the phrase "irrational exuberance"

Contagion Effects

The tendency for a government budget deficit to raise the real interest rate and decrease investment

Crowding-out effect

Is the relationship between the quantity of investment demanded and the real interest rate, other things remaining the same.

Demand for loanable funds

A ___ in expected profit decreases investment and shifts the demand for loanable funds curve leftward to DLF2.

Decrease

Is the income earned minus net taxes.

Disposable income

Other things remaining the same, -The greater a household's disposable income, the greater is its saving. -The greater a household's wealth (what it owns), the less it will save. -The higher a household's expected future income, the smaller is its saving today.

Disposable income

A ___ in the real interest rate decreases the quantity of loanable funds supplied.

Fall

A ___ in the real interest rate increases the quantity of loanable funds demanded.

Fall

____ is the major item that influences the demand side of the market for loanable funds.

Investment

The ___ the real interest rate, the smaller is the quantity of saving and the smaller is the quantity of loanable funds supplied.

Lower

Such as the phase of the business cycle, technological change, and population growth

Objective Influences

The many influences on expected profit can be placed in three groups:

Objective, Subjective, Contagion influences

Is the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period

Quantity of loanable funds demanded

A __ in the real interest rate decreases the quantity of loanable funds demanded.

Rise

A ___ in the real interest rate increases the quantity of loanable funds supplied.

Rise

Summarized in the phrase "animal spirits"

Subjective Influences

Is the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.

Supply of loanable funds

The proposition that a government budget deficit has no effect on the real interest rate or investment.

THe Ricardo-Barro Effect

Is the aggregate of the markets for loans, bonds, and stocks.

The market for loanable funds

Is the total funds available from private saving, the government budget surplus, and international borrowing during a given period.

The quantity of loanable funds supplied

Firms invest only when they expect to earn a rate of profit that exceeds the ______.

The real interest rate.

Is the opportunity cost of the funds used to finance the purchase of capital.

The real interest rate.

Changes in the Demand for Loanable Funds

When the expected profit changes, the demand for loanable funds changes

To find the supply of loanable funds, we must ___ the government budget surplus to ____.

add, private saving supply

The real interest rate is the opportunity cost of ___.

consumption expenditure

An increase in the supply of loanable funds brings a lower real interest rate, which ___ the quantity of private funds supplied and increases the quantity of investment and the quantity of loanable funds demanded.

decreases

If the supply of loanable funds increases, the real interest rate ___.

falls

The higher the real interest rate, the ___ projects that are ___, so the ___ is the quantity of loanable funds ___.

fewer, profitable, smaller, demanded

The lower the real interest rate, the ___ projects that are profitable, so the ___ is the quantity of ___ funds demanded.

more, larger, loanable

The increase in the demand of loanable funds ___ the real interest rate, which increases the quantity of private funds supplied.

raises

If the demand for loanable funds increases, the real interest rate ___.

rises

If the real interest rate is 4 percent a year, the quantity demanded exceeds the quantity supplied. There is a ___ of funds. The real interest rate ___.

shortage, rises

If the real interest rate is 8 percent a year, the quantity demanded is less than the quantity supplied. There is a ___ of funds. The real interest rate ___.

surplus, falls